On March 12, 2019, the European Union (EU) updated the EU Blacklist of Non-Cooperative Jurisdictions in Taxation Matters (“EU Tax Blacklist”) and added 10 new jurisdictions to the list, including Aruba, Barbados, Belize, Bermuda, Fiji, the Marshall Islands, Oman, the UAE, Vanuatu and Dominica. The British Crown Dependencies (Guernsey, Jersey and the Isle of Man) have avoided featuring on the EU Tax Blacklist as they have made significant efforts to enhance their tax governance and compliance arrangements and have been determined as cooperative tax jurisdictions.
What does this mean in practice? This means these jurisdictions have met international standards of tax transparency, fairness and combating financial crime such as tax evasion. However, this is an ongoing requirement and all three will need to continue to cooperate, maintain an open dialogue with the EU and work towards improving standards. As an example, Guernsey is currently working on the implementation of Mandatory Disclosure Rules for the Common Reporting Standard (CRS) Avoidance Arrangement and an international integrated platform for sharing information on corporate beneficial ownership. All three Crown Dependency governments introduced legislation in 2018 requiring businesses that operate on the island to demonstrate adequate economic substance, including that a company is tax resident on the islands, there is income arising to the company and such income is received in relation to its core income generating activities.
The Cayman Islands, another well-known offshore financial centre, has also avoided the EU Tax Blacklist but will need to amend legislation by the end of 2019. The Cayman Islands will also need to demonstrate a commitment to addressing concerns around the rationale and economic substance of collective investment funds by defining acceptable requirements and practices. A new law was passed in 2018 requiring companies that are part of a multinational group with an annual turnover of greater than US$850 million to pass an economic substance test to be considered resident for tax purposes. This test entails demonstrating local physical presence and economic activity via, for example, staff, office space and expenditure.
Jersey, Guernsey, the Isle of Man and the Cayman Islands all welcome this as positive recognition for their ongoing cooperation and commitment in this area.
Countries blacklisted by the EU face potential restrictions on EU funding and investments from the European Investment Bank. In practical terms, financial services firms within the EU will have to consider risks associated with customers coming from or having association with countries on the EU Tax Blacklist and apply enhanced due diligence and undertake better transaction monitoring. In the UK, there is an expectation that the EU Tax Blacklist is considered as part of the country risk assessment process, which is an integral part of the overall assessment of the money laundering risks associated with customers.
The EU plans to review the list regularly factoring in how jurisdictions fulfill their commitments and the benchmarks used to establish the EU Tax Blacklist. In the meantime, firms should review their country risk assessment criteria, consider their financial crime risk appetite and clearly define their view on doing business with customers coming from countries listed on the EU Tax Blacklist. This includes setting up risk tolerance levels that would be deemed acceptable.